Counties warn of funding uncertainty from business rates localisation

Funding for public services will become “highly variable” in many county areas under government plans to make councils financially self-sufficient by the end of the decade, government has been warned.

In an analysis of the plan to fully devolve business rate revenue, undertaken for the County Councils Network, Pixel Finance Management found the growth in net business rates in these areas was below average.

In many counties, particularly in rural areas, small businesses often claim reliefs. As a result, a growth in business premises often does not translate into a growth in business rate income received by the local authority in county areas.

The government plans to devolve business rates to authorities by 2019-20. A funding baseline is likely to be set for town halls using local business rates as well as either a top up or tariff payment to reflect a new assessment of local need. Authorities will then retain all local growth, up from the 50% share currently allotted to the sector, and will be financially self-sufficient, with other locally raised revenue, mainly council tax, used to provide services.

However, the review highlighted the volatility of business rate income, which fell in three large counties between 2010 and 2016, despite the fact they all make large contributions to the national economy. Surrey contributed £37bn in gross value added to the UK economy in 2014, but its business rate income fell by almost 15% between 2010 and 2016. Meanwhile, Hertfordshire contributed £32bn, but its business rate fell by 11% in the same periods, and Kent contributed £31bn but its business rate income fell by 5%.

In addition, rateable values per head in London average £3,700 compared to £851 in county areas, while revenues within a county can also vary widely. In one county, the research showed growth in rateable values was as high as 20%, with four other districts witnessing reductions of over the same period.

CCN vice chair and finance spokesman David Borrow said he welcomed the localisation, but warned that a well-intentioned policy could end up being unfair, with areas outside the major conurbations being left behind other parts of the country.

If the new system is not properly designed, it could leave already-underfunded services for the vulnerable and elderly in county areas worse off, at a time of growing demand, particularly for adult social care.

“This study shines the spotlight on just how complex the system is… the need is to create a scheme that delivers for local authorities, businesses and residents, particularly in two-tier areas,” Borrow stated. “The rate retention system needs to be designed in a carefully considered, open, transparent and fair manner.

“But before that, we must get the needs-based review of funding right, to set a baseline that properly assesses what counties need to fund an acceptable level of services, both in the present, and future. Then we can look at setting a sustainable rates retention system that does not simply deliver for small pockets of the country.”

Currently, retained rates are split 80-20 to districts in two tier areas, and CCN said it was working closely with the District Councils Network on a submission for a retention system in two-tier areas. The group also said that the design of the new regime needed to include safety nets for when revenue falls, and allow for frequent resets of the localisation system to ensure urban areas such as London do not receive disproportionate funding allocations. CCN, which represents 27 councils, also called for increased fiscal freedoms, including the ability to increase business rates – even for areas that do not have an elected mayor, which would not be allowed under current plans.

2015 Public Finance. Public Finance is published on behalf of the Chartered Institute of Public Finance and Accountancy by Redactive Publishing Ltd. All rights reserved. Reproduction of any part is not allowed without written permission. Redactive, 17-18 Britton Street, London, EC1M 5TP